Lessons From The Facebook Effect

There’s been lots of buzz this week about Facebook’s debut of Places, its location-based feature that allows your friends to tag you when they check-in to a place.

The feature has, naturally, brought up concerns about privacy, as Connie already wrote about. But this is nothing new for Facebook, which now has more than half a billion members and has dealt with its share of privacy concerns in the past. Does anyone remember Beacon? The social networking site weathered that storm pretty darn well, and I predict the little uproar over Places will likely not prevail.

I base that opinion partly on reading “The Facebook Effect,” which came out this summer and which I previously said, in the vernacular of Facebook, that I like.

One thing the book does well is give great insights and background in how the company grew from a Harvard University dorm room to one of the largest and most talked about tech companies.

Particularly of interest to peHUB readers is the emphasis the book places on the venture capital industry, such as how Accel Partners became a partner and even how Roger McNamee, of Elevation Partners, played a role in Sheryl Sandberg leaving Google to become COO of Facebook.

I pinged the author David Kirkpatrick to ask him some VC-related questions about Facebook. PE Week subscribers can read the Q&A here.

Here’s an edited sample of some of the discussion:

Q: What lessons can startups learn from Facebook and how they dealt with investors?

A: The most important lesson is the centrality of having a powerful founding vision that is stuck to by the entrepreneur with ferocity. And in Mark Zuckerberg’s case it helped immensely that it was a vision founded on changing the way people communicate as opposed to something like changing how they digested advertising. The scope of the company’s ambitions helped it recruit similarly passionate young employees, many of whom still work there. Also, any startup which can mimic Facebook’s ability to browbeat its investors into allowing the founders to maintain complete managerial control obviously should do so. But it was only possible in Facebook’s case because the company already by early 2005 had such impressive momentum that VCs were banging on the doors to get in.

Q: Your book mentions SharesPost and SecondMarket, which have pushed up the valuation of Facebook. What’s your take on the secondary shares market?

A: The Facebook Effect is felt in many realms—politics, business, marketing, media, government and of course finance. The effect is different in finance though, because it is how the company is managed, not the characteristics of its product. The rapid rise of this company and its leader’s resolute disinterest in an IPO is largely what has enabled these private markets to come into existence. Facebook has been without question the signature stock for the marketplaces. It appears that many other companies are now eager to follow its lead and delay an IPO as long as possible. Zynga Game Network appears to be taking this route. It’s a great strategy if you think the growth years are still ahead for the company.

Q: Anything else?

A: The downside for Facebook, though, is that it is losing many of its top people—those who have been there the longest—because with the private markets they have an easy way to sell their shares regardless of whether the company goes public. Facebook appears to have been quite deft at managing this process, though,  to reduce the chances of a rapid increase in the number of shareholders which could then trigger a required public offering under SEC rules.

One way they’ve done that is with the help of Russian investor Yuri Milner and his Digital Sky Technology, which has served as a sponge to buy up huge numbers of shares from anyone who wanted to sell. This enables people to get a fair price without increasing the number of shareholders. In fact, in some case it has led to a reduction in the number of shareholders, through the consolidation effect of DST. Milner probably now owns 8% to 9% of Facebook and has spent in the vicinity of $800 million all told buying its shares.

Q: In light of the movie “The Social Network,” which is due to come out in October, would you like to see your book turned into a movie?

A: I would love to see my book made into a movie and I think it could be as dramatic as “The Social Network,” if not as sexualized, even while telling a story which hews much closer to the truth.